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Global Business Environment

Pradip Chakrabarty

pradip@fsm.ac.in

Room No. 8.Ph. 4124 2499

mailto:pradip@fsm.ac.inmailto:pradip@fsm.ac.in

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Changing Environment of Global

Business

Globlisation

An English princess

with her Egyptian boyfriend,

driving a German car

with a Dutch engine,

driven by a Belgian

who was drunk on Scottish whiskey,

followed closely by Italian Paparazzi,

on Japanese motorcycles, ..*

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Free movement of

Goods/ServicesCapital

Technology

Labour

across borders.

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Forces behind globalization

--25% global production sold abroad(7% in 1950).

--Import restrictions decreasing

--Foreign ownerships increasing

--Trade progressing faster than production

--Deepening relationship,

--Broadening interdependence

Wider resources, products, services, mkts

Variety, qlty, prices improve.

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Factors leading to growth in globalization :--

1.Tech growth :

-- Transportation, communication and in all

areas

2. Liberalization of trade :

Trade barriers brought down.

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3. Growth of support services:--

Banking, payment, insurance, trademissions, trade fairs, storage ,

distribution, courier, internet, personal

visits etc.

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4. Growing consumer pressure:

Rise in income

rise in demand, taste, qlty, novelty, niche.

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5. Increased competition:

Producers of diverse/ dissimilar products &

services compete for consumers

discretionary/ surplus/ disposable income

This pressure forces firms to look outside to

source/ sell

International/ global approach aids

competitiveness

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6. Changing political scenario :

--Breaking of communist bloc

-- foe to friend stories among nations.

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7. Increased international cooperation:

Treaties, agreements

reciprocal advantage, growth in mutual exim,

addressing common issues,

Travel facilities, security of investment, patents,

trademarks, copyrights,Construction & developmental projects along the

border areas for joint good,

Fight against disease, flood, calamities.**

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Global environmental Factors & Issues

(General aspects)

Cultural

-- Culture > integral part of operating envn,

--Every bsns function subject to cultural

issues

-- own culture may not be the best always

-- sensitivity to cultural differences for

decision making

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-- awareness of foreign culture

-- cultural dynamics-- behavioral practices accept, adjust,

appreciate

-- dealing with cultural differences/ culturalcollision

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Political & Legal

-- Different mkts different situations

--part of the external envn influencesmanagerial decisions

-- relation betwn Govt and bsns largely depends

on these issues

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-- intrinsic differences exist

practice, procedure, strategy

have to adapt

straight transformation

unlikely--opportunities & threats vary

due to politico-legal structure.

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-- role of Govt

-- political ideology

--political risk--legal structure

assume importance.

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Economic

--1975 2000, world economic outputdoubled

--some countries prospered faster

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-- some companies moved up

very rapidly, surpassing theGDPs of many countries

-- understanding the impact of

economic changes essentialfor wiser investment

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-- change in policy / status in one country

impacts others

(event of 9/11 in USAand the consequences there,

affected Indian IT sector)

--Economic envn of competitors countries

-- economic policies indicate Govt goals/

objectives and mkt transition

-- small economic changes can impact mkt.

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National Differences in Political, Social,

Legal Environment

-- Individualism & Collectivism

Rights & roles of individuals or community

Role of Govt to give primacy accordingly

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Individualistic socity

mkt correction by Govtpublic awareness, fair play,

monopoly issues

encourage competitionless

control.

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Collectivistic socitiesGovt agencies play

stronger role

industry structure, corporate & managerialconduct

equality, welfare, democracy in workplace.

Socities pluralisticclass oriented, linguistic grps, tribal/ ethnic/

religious grps

competing ideologies, interests

Influence political system/ conduct.

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Political system

2 extremesDemocracy free opinion, election,

judiciary, bureaucracy, property rights --.

Mkt based bsnsTotalitarianism forcibly controls bsns

envn.

Transition to open economy happenin bigway delinking politics with economy.

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Certain Political Risks :

shift in public policy

differential treatment for/ against foreign cos.

-- procedural regulations, lawlessnes etc. etc.

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Legal Envn

Common Law system tradition, judgment

based.

Civil Law systematic, codified laws.

Theocratic system base on religious,

spiritual tenets.

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Whatever system impact on investment,

repatriation, dividends, tax, duties,reporting obligations, IPR, labour laws,

working hrs, starting/ closing of bsns,

registration rules, obstacles in bsns.Some specific concerns :--

--Product safety & liability acc to local stds.

-- Mkting freedom on 4Ps (e.g. cigarettead).

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-- Country of origin differential treatment,

local content requirment.

-- Legal jurisdiction

choice of law and theforum.

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Intl Economic Envn

Change in one element of economics

Change envn.

Important indicators :

GNI (Gross National Income)total value ofall goods & services produced by a country in

a year.

GDP (Gross Domestic Product) total value

of all goods & services produced within the

borders of a country in a year, including

foreign owened companies.

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more relevant GNI per capita divided by

population.

GNI growth rate, std of living important eco

potential indicators.

Human development access to knowledge,

nutrition, food, healthcare,

employment, law and order, recreation, freedom

of expression etc.

Inflation aggregate demand> aggregatesupply prices up more than income rise.

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Inflation interest rate, exchange rate, cost

of living, eco stability, political stability.

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Balance of Payment

Inflow Credit (+)

Outflow Debit(-).

3 components of BOP :

a) Current A/c goods, services,transfers(remittance).

b) Capital A/c investment and lending

activities.c) Reserves a/cgold, forex reserves.

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Current A/c

Net flow of goods, services (may be invisiblelike shipping services), gifts, transfers etc.

Capital A/c

Portfolio (purchase of financial assets withmaturity beyond one yr).,

Short-term investment (securities maturing inless than a yr),

Direct investment (mgt control is exerted),Govt borrowing/ lending.

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Official Reserves

It measures the nations surplus or deficitbalance on its current and capital A/cs.by netting the reserve assets/ liabilities.

Surplus increase in forex, gold.BOP indicates economic health of the

currency.

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Political & Country Risks

Political decisions/ events can affect

profitability of bsns.

e.g.

Nationalization unilateral taking over

meagre/no compensation.

Civil strife/ war.Breach of contractby Govt or by domestic

cos with Govt approval.

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Imposition of tariffs, local content, export

obligations.

Kidnap, extortion, terrorism.

Profit repatriation limits.

Labour rights.Discrimination in taxes domestic vs

foreign/ favoured nation.

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Types of political risks :

Shift in public policy

In disfavour of foreign/ dominating cos

To gain greater share of the benefits

May be for the masses

shift fromindividualism to colectivism

These are systemic political risks.

--------------------

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Corruption makes operations costly.

Bureaucracy, customs assistance, speed

money bribe big riskProcedural.

------------------

Foreign investor prospers envy in host Govt

More benefits to host country desiredMonetory policies, tax structures, regulations altered

Distributive risk.

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Ethnic violence, civil disorder, war, military

upheavals, and international terrorism

affect one and allCatastrophic.

So 4 types of political risks systemic,

procedural, distributive, catastrophic.

Assessment varies from detailed

statistical reports to impressionistic tales

of recent visitors.

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Which are the countries with particular

political risks ?Russia,

Iraq,

India ?Salim ?

Posco ?

Enron ?

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Systemic

Shift in public policy

shift from individualismto collectivism.

(Change at policy level)

Distributive

Monetory policies, taxlaws, regulationsaltered

More benefits to hostcountry desired.(Change at functional

level).

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Cultural Differences : Impact on Bsns

Culture not isolated from economy,politics.

Genl expectation > people from other

cultures to respond same way as we do

leading to cultural clash.

But culture evolves, changes.

Certain traits found similar across theglobe,e.g. attitudinal difference betwn

urban & rural people, managers & workers

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How does culture form ?

Parent to child, teacher to taught, leader tofollower, ..

Basic values instilled in childhood.

Change by choice ( when newopportunities are in hand) or imposition

(mostly by masters cultural imperialism).

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Cultural stabilizers : Language, religion.

Same language culture spreads easily.

Religion provides strong values.

Bsns organisations have to care for local

beliefs on products, components,timings ..

Multi-religious countries friction to gain

religious control of political power

chaos impediment to bsns.

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Behavioural practices affecting bsns : --

1.Stratification systems of societies,

2. Work motivation

Stratification systems of societies :

a. Performance criterion (e.g. US society)employment, promotion on merit,

competence, competition no

discrimination on age, seniority, gender,

ethnicity, religion etc.

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b. Gender-based grps certain gender

prefered in sectors or in genl,

Nursing, secretarial.

c. Age based grps senior wiser

seniority promotion.Also may be, younger more productive

Opportunities for products to look younger.

d. Family-based grps family status mostimp. not much trust outside the family

memebers. ( Chinese family bsns in S.E Asia).

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Work motivation : varied motives to work

Certain societiesIncentive for work

economic development desire for material

wealth

Work to gain salvation.

Success & reward different countries

Different probabilities of success

Different rewards, different consequences offailure.

How wd u enthuse the workers ?

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High uncertainty of success with high

reward, and little or none for failure.

Values underlying behavioural differences --

Power Distance :

Relationship betwn superiors-subordinates.Hi distance??

Autocratic.

Low distance??Consultative.

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Individualism / collectivism :

Hi individualism

How wd u motivate ??

Challenging jobs

Satisfying which need ??

self actualization.Hi collectivism

How wd u motivate ??

Safe physical & emotional environmentSatisfying which need ??

Security needs.

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Ethical Issues

Foundation : -

Cultural and Legal

Teachings from family, scriptures,observation, experience, economic

condition

sense of right, wrong

deep-seated ethical beliefs.

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Sense of ethics varies grp to grp.relative

intervention unethical.

Certain other issues of ethics certainbehaviour universal.

Expected basic practice ordinary decency

honesty, fairness.Respectable conduct by foreign enterprise

Trust of the mktBusiness success.

M ltil t l t i t

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Multilateral agreements exist on

employment practice, consumer

protection, environment, human rights,political activities.

NGOs currently put pressure to behave.

Ethi l i d b l

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Ethics also imposed by law,

But unethical not necessarily, illegal.

All laws based on moral perception,experience, enforceability cannot

foresee all future issues.

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Irresponsible, unethical conduct

bad publicity

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Important contemporary issues of ethics :--

-- Global warming >

drawing natural resources need to beconcerned abt env impact.

-- Tired pricing of pharmaceuticals

Higher price in richer countries.

-- Labour conditions

Fair-wage, child labour, workhours,

conditions, union rights.

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Irresponsible, unethical conduct

bad publicity

Lower employee moralLegal action, social boycott

declining sales.

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Govt. Intervention & Trade Control

What, how much, with which country a

country shd trade ?

Shd mkt forces decide these Laissez-

faire approach ?

Shd Govt intervene ?

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Different theories to guide policies.

If no restriction, exports will take place from

low to high cost of prodctn countries.Restrictions exports hampered prodn

may happen in restricting countries.

Inter entionist Theories

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Interventionist Theories :

Theory of Mercantilism :--

Wealth is measured by treasure (gold)Export more than import

Restrict import save outbound

expenditure

Colonial practice prevent colonies from

manufacturing.

Theory of Neo-Mercantilism

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y

Generate favourable balance of trade

To gain social, political objective

Produce more than domestic demand

Export surplus

have full employment.

Free Trade Theories :

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Free Trade Theories :--

Consumers buy what best serves their needs

leads to specialization in prdctn.

Theory of Absolute Advantage

Real wealth of a nation from good s , servicesavlble to people, not just treasure.

Natural advantage climatic, minerals etc.

Acquired Adv. process, product tech.Theory of Comparative Advtge.

H M h t T d ?

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How Much to Trade ?

1)Theory of Country Size suggests

Large cntries depend less on trade thansmall ones

Varied climates, different natural resources

more chance of self-reliance

E t d i t h l f th i

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Export and import much less of their

production and consumption respectively

more distance to be coveredMore expensive logistics.

2) Si f E

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2) Size of Economy

Large economies dominant world traders

Produce enough to sell & exportGenerate hi income more purchases

by people of home goods & imported

goods.

What type of Goods to Trade ?

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What type of Goods to Trade ?

1)Factor-Proportion Theory suggests

Land, labour, capital whichever isabundant compared to the other 2 wd

decide the type of goods to be produced.

If labour abundant labour intensive

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If labour abundant labour intensive

goods.

But labour skills, productivity variesLeading to international specialization by

tasks, e.g. R&D (high education),

production (cheap workers) etc.

2) P d ti T h

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2) Production Tech

Different methods posbl, e.g. with high

labour or high tech (capital reqd).3) Product Tech

Mfg reqrs acquired advantage >

education, training, technology, R&Dfound in rich cntries.

Poor cntries mostly primary products

less product differentiation.

Dynamics of Trade

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Dynamics of Trade

1) International Product Life Cycle Theory

Production Location for certain kinds ofproducts shifts as they pass thru their life

cycle.

New prdct innovation R&D, hi-incomecntry domestic mkt introduction

stage exports to other hi-income cntries

Mkt expands, demand increases (growth)

prodction standardises, cheaper

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equipments for mass prodction appears

Competitors arrive prodctn starts other

cntries

Eventually, low cost cntries become prdn

lacales sell locally

Then exports back to original innovating

countries.

2) Porter Diamond Theory

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2) Porter Diamond Theory

4 conditions, important forcompetitive

superiority a) Demand Conditions (spurs innovation),

b) Factor Conditions (provide advntge due

to absolute or factor-proportion reasons) ,

) R l t d & S ti I d t i

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c) Related & Supporting Industries

(ancillaries, inputs etc),

d) Strategy, Structure & Rivalry(rivalry, competition force further break-

through in process/ product.

Combination of a, b, c, d affects sustenanceof competitive advantage.

Govt intervention : Economic Rationales

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Govt intervention : Economic Rationales

1)Unemployment :

Restricting imports to protect jobs can meetwith retaliation by counter restrictions by

other countries.

Small economies can less retaliate.Capital intensive prdction greater trade

loss than job loss.

2) Infant Industry :

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2) Infant Industry :

Shielding emergent industries from

international competition whole mkt todevelop competitive edge >

greater efficiency, economy of scale.

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3) Industrialization :

Protectionism to encourage faster growth

thru industrialization, luring investment,promote exports

4) E i i

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4) Economic issues :

BOP adjustment thru trade,

fairness/ access in reciprocation betwncountries,

bargaining tool, price control objective.

Non Economic Rationale for Protectionism :

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Non-Economic Rationale for Protectionism :

Essential/ strategic industries maintainance,

No shipment to unfriendly countries,*Creating a sphere of influence thru aids,

credits, grants.**

WTO REGIME

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WTO REGIME

After World War II International TradeOrgn. (50 Countries)

23 countries agreed to Trade Rules &

Tariff ConcessionsKnown as GATT.

1994 123 countries membership

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1994 123 countries membership

GATT -- 1948 to 1994, average tariff for mfgd

goods 40% to 4%

WTO currently abt 150 members 97% world

trade.

Agreements aimed by consensus

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Agreements aimed by consensus.

Agreements ratified by parliaments of membercountries.

Basic functions of WTO :--

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Basic functions of WTO :

1. Facilitate implementation, administration andoperation of trade agreements

2 forum for further negotiations on matters within

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2. forum for further negotiations on matters within

its mandate

3. dispute settlement

4. periodic review of trade policies of member

countries

5. Provide tech assistance, training programmes

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, g p g

6. Eencourage cooperation within international

orgns.

7. WTO provides foundation for multi-lateral

trading system,

Based on follg principles :--

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Based on follg principles :--

Trade Without DiscriminationMFN (Most Favoured Nation) treatment

Any favour/ concession must be to all.

Exceptions to MFN

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Exceptions to MFN

free trade agreements,

mkt access to dvlping cntries, raising barriers against specific cntries to protect

against unfair trade.

National treatment local and imported goodsget same treatment once goods are in the cntry

Gradual Move Towards More Free (less restricted)

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Gradual Move Towards More Free (less restricted)

Mkts Thru Negotiations

Progressive liberalisation,

longer period granted to dvlpg nations.

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I li ti f WTO I t ti l Mkt

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Implications of WTO on International Mktg

A. Binding concessions & commitments

Security of access to foreign mkts.

B Agreement on customs valuation

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B. Agreement on customs valuation

Importers declared value will be accepted for

customs purpose (e.g.duty calculation).

C.Agreement on pre-shipment inspection (of price)

Reduce malpractice of under/ over invoicing.

D. Agreements on import licensing procedures

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g p g p

Licenses, if reqd, for the prdct will be issued

expeditiously.

E. Rules applicable to exports

reimbursement of indirect taxes on exported

prdcts.

F. Anti-dumping & Countervailing actions

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F. Anti dumping & Countervailing actions

Exporters of subsidised prdcts expect imdt

notice if investigation begins.

INTERNATIONAL INSTITUTIONS

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INTERNATIONAL INSTITUTIONS

UNCTADUnited Nations Conference on Trade &

Development Estd.1964 with 164

members.

Objectives

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Objectives

1.Forum for dvlping cntries to discuss

problems on Econo. Dvlpmnts.

2.Formulate policies on trade, aid,

transport, technology, finance etc. for

dvlopmnt purposes.

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3. Negotiate multinational trade

agreements betwn nations for economicand overall develpmnt of the dvlping

and underdvlped cntries.

4. To prepare proposals for putting itsprinciples and policies into effect.

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3. No discrimination on differences in

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socio-economic system, and adoptionof trading methods, policies to beconsistent with this principle.

Achievements

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Achievements

GSP Implementationlow tariffs for mfgd goods from devlping &

underdevlped to devloped cntries

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Not all cntries benefited equally.

Primary agro exporting cntris

particularly.

Constraint of enough transformation i.e.

value addition.

Quota restrictions.

Obj ti f GSP

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Objectives of GSP :

-- increase export earning, promote

industrialization, accelerate economic

growth

Preference-receiving cntris adopt

measures to assist their producers/

traders / exporters

-- Identification of

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-- Identification of

export opportunities/products,

introduction of import duty drawback,trade agreements with socialist cntries,

-- Establishmnt of ancillary units to satisfyth l f i i

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the rules of origin,

rail frt subsidy,

participation in trade fairs, exihibitions,

advtsing to overseas mkts.

Non tariff barriers

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Non-tariff barriers

UNCTAD prepared members to

effectively participate in multilateralnegotiations regarding

import licensing,

import quotas,

Govt procurement stds

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Govt procurement stds.,

packing, labelling,

health & sanitary reqrmnts,

customs procedure etc.

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International Moneytory Fund (IMF)

Cooperative insttn to maintain a stable

system of buy and sell of currencies

Quick, smooth payment of foreign money.

-- Lends money to members with

conditions.

-- No authority on countrys domestic

matters.

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a) INTERNATIONAL BANK FOR

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)

RECONSTRUCTION &

DEVELOPMENT(IBRD) To combat poverty by providing loans,

advice, assistance to developingcountries to support their economic and

social growth.

b) INTERNATIONAL DEVELOPMENT ASSN(IDA)

For lending to the poorest countries.

WTO

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WTO

GATTWTO, Jan 95.

Deals with vital areas of eco

activity, incorporates enforceable

rules.**

REGIONAL ECONOMIC

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INTEGRATION

Geographical group of cntriesagreements reduce, remove tariffs,

non-tariffs free flow of goods, services,

factors of prdction. Name some.ASEAN, EU, NAFTA etc.

more rapid progress towards free trade

than thru WTO.

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Trade generation Vs Trade Diversion.

Levels of Integration (by heirarchy)Gives rise to currency union, political

union.

1. Free Trade Area > barriers removed.

2. Customs Union Barriers removed, +

common external trade policy.

3. Common Mkt customs union + freemovement of labour, capital.

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4. Economic Union Common mkt +

common currency, harmonization of taxrates, common fiscal policies

very high degree of administrative and

bureaucratic coordinating skills reqd.5. Political Union Union Parliament

elected by people of member cntries,

common defence policy.

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Why Reg. Integration ?

Acc. to eco theories

Unrestricted free trade cntries willconcentrate on their areas of efficiencies

greater world prdctn will happen.Other view

Nation may gain, individuals/ grps. in certain

sectors may loose,national sovereignty may get diluted to

some extent.

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These integrations are good only if,

trade created > trade diverted.*Some economists feel that it is not

happeing always, and hence they

oppose.**

Foreign Direct Investment

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FDI Intl capital investment

(but not always),can be by transferring mgrs, providing other

expertise,

by exchange of stocks.--whose control ? Major investors ?

Dispersed ownership small %age can

establish enough control Govt steps infor minority owners.

Controlling interest desired, because

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1.Cos self handling reduce costs

Cheaper to handle oneself,2. Deny competitors access to resources,

lessen the chance of developing

competitors,3. Easier to deal globally.

Methods of FDI :

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1.Acquire/ buy an existing facility -- no

addition to capacity --reforms across globe privatisation

lot of Cos on sale overseas invstmnt

opportunity.1.Construct new one/ green field

investment.

Benefits/ reasons of acquisition

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a. Difficulty to transfer resources, local

resources avlbl, orgn structure exists.b. Less adaptation to host culture needed.

c. Brand/ goodwill liveraged.

d. Gain access to local capital,e. Start up inefficiency eliminated,

f. Mkt may not sustain additional capacity,

g. Price of an under-performing Co less than astart-up cost

Benefits/ reasons of Greenfield

8/14/2019 GBE FDI119

115/122

a.Suitable Co for acquisition not avlbl,

b.Sectors with less competition,c.Laws hindering acquisition to promote

capacity creation, more competition, less

dominance by ltd No. of firms.

Motives/ reasons of collaboration (less than

100% hi )

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116/122

100% ownership):

1.Laws of host cntry on limit of ownership/repatriation of profit, strategic sectors etc.

2.Scale Allianceefficiency thru pulling of

similar assets to grow in bsns,3.Link Alliance use complimentary

resources for new bsns areas,

4.Gain location specific assets

access todistribution system, manpower, local

cultural issues,

5.Protection of copy right/ brand thru

partner

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117/122

partner.

6. Geographical diversity obviateseasonality/ bsns cycles problems

servicing multiple mkts.

7. Sharing of risk in host cntry, and also

globally for large MNCs

8/14/2019 GBE FDI119

118/122

Franchising :

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119/122

Franchising :

Particularly relevant for service sector

Healthcare, specialty retail, education ,

Brand name, trademark, prodn &

processing technics,,mktg guidelines service levels, shop

area/ layout, minm sales, ,

Intellectual property rights given over along time.

Contract Mfg:

8/14/2019 GBE FDI119

120/122

Mfg done at offshore location on contract,

Producer & mkter are separate.

Joint Venture :

8/14/2019 GBE FDI119

121/122

2 or more firms equity participation

new co formed expertise, resources,

strength shared

-- Foreign investment barrier overcome

Local contact liasion Govt taken care of

8/14/2019 GBE FDI119

122/122

Local contact, liasion, Govt taken care of

Easy, speedy way of entry.*(Often stronger partner acquires weaker

partner maruti-Suzuki, Escorts-

Yamaha).**